"The US squandered its economic and financial power by running reckless economic policies, especially its twin fiscal and current account deficits. The last time around the current account started to go into negative territory in 1991 after a brief surplus during the 1990-91 recession. In the 1990s the growing US current account deficit was driven by a private investment boom – the internet technological revolution – and thus the accumulation of foreign liabilities of the US was driven by FDI and M&A activity, i.e the US accumulated foreign liabilities in the form of equity rather than debt. But since 2001 the further worsening of the US current account deficit was driven instead by growing fiscal deficits - especially in the 2001-2004 period – caused by unsustainable tax cuts and by the buildup of spending on foreign wars and on domestic security and since 2002 by the collapse of household savings and boom in investment in unproductive stock of housing capital that the housing bubble induced. And while the weak dollar is now inducing a modest improvement of the external deficit the looming sharp increase in fiscal deficits - that the current recession and financial crisis is inducing - will cause a return of twin deficits in the coming years. By now the US is the biggest net borrower in the world – running current account deficits still in the 700 billion dollars range – and the biggest net debtor in the world with its foreign liabilities now over 2.5 trillion dollars.

The trouble with these twin deficits is multi-fold. First, superpowers and empires - like the British Empire at its peak - tend to be net lenders – i.e run current account surpluses – and be net creditors, not net debtors; The decline of the British Empire started in World War II when the British fiscal deficits in the war and the current account deficits turned that empire into a net borrower and a net debtor both in its public debt and external debt. That financial switch into an external debtor and borrower position was also the reason for the decline of the British pound as the leading reserve currency. And the British twin deficits were being financed by a rising economic and financial power that was a net lender and a net creditor, the US.

Second, the last time the US was running large twin deficits in the 1980s the main financers of these deficits were the friends and allies of the US, i.e Japan, Germany and Europe as the US external deficit was against these economies. Today instead the economic powers financing the US twin deficits are the strategic rivals of the US – China and Russia – and unstable petro-states, i.e Saudi Arabia, the Gulf States and other shaky petro-states. This system of vendor financing – with these US creditors providing both the goods being imported and the financing of such deficits – has led to a balance of financial terror: if these creditors were to pull the plug on the financing of the US twin deficits the dollar would collapse and US interest rates would go through the roof.

Third, while it is unlikely that China, Russia and other powers would suddenly pull the rug from under the US feet – as such action would lead to a sharp appreciation of their currency and negatively affect their export led growth model – relying excessively on the kindness of strangers – especially that of your strategic rivals – is extremely risky. Since almost 100 percent of all US fiscal deficits since 2001 have been financed by non-residents – as US residents net holdings of US Treasuries have been flat since 2001 - by now the total stock of US Treasuries held by non-residents is getting close to 60 percent. And the foreign financing of the US current account deficits has also become more risky: less FDI and equity, more debt, more short term debt, more debt held by official political actors – central banks and sovereign wealth funds – , less debt held by foreign private investors, and more debt held by politicals rivals rather than allies of the US. This change makes the US vulnerable to such rivals using the financial terror weapon – dumping US assets and or reduicing their financing of the UStwin deficits – in situations of geostrategic tension.

All these changes in the economic, financial, reserve currency and geopolitical role and relative power of the US will not occur overnight. But the trend is clear. The rise of the BRICs and other emerging market economies; the continuation of the process of economic and political integration in Europe; the US policy mistakes in economic, financial and foreign policies will steadily erode the power of the American Empire. This process will not be sudden and will take a couple of decades. But the trend is clear: the brief period of unipolar power of the American hyperpower is now over and a new age of balance of great powers is starting in the world. Also, the rise of non governmental actors – multinational corporations, NGOs, terrorist groups, non-nation state powers, failed and unstable states, non-traditional global players – will radically change the traditional balance of power as the power of nation states will shrink relative to that of other global players.

Whether the decline of an hegemonic power providing global public goods – security, free trade, freer mobility of capital and people, inducements to free markets and democracy, better environment, peace – will lead to a more stable world with many powers multilaterally cooperating on these global economic, financial and geopolitical issues; or whether the absence of such stable hegemonic power will lead to a more unstable world characterized by conflicts – economic, political and even military – among traditional nation states, great powers and non-traditional actors is an open and difficult issue. But it is certain that the decline of the American Empire has started."